Economic growth hit 6-year high in last quarter

January 29, 1994|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- The economy made its strongest showing in six years during the final three months of 1993, growing at an annual rate of 5.9 percent and showing reassuring signs of low inflation, the government reported yesterday.

Economists warned that the Commerce Department's numbers were an aberration. The economy is almost certainly already backing off that torrid pace, they said, and inflation is likely to grow more quickly this year than the numbers indicate.

"Everything fell into place for the economy," said Robert Dederick, chief economist at Northern Trust. "Some of it was clearly unusual and not likely to be repeated, but the overall picture was very solid."

The figures for the October-December period helped boost the gross domestic product in 1993 by 2.9 percent for the full year, the highest annual rate since 3.9 percent in 1988. The gross domestic product is the total of all goods and services produced in the United States.

As much as one-third of the growth during the final months of the year came from rebuilding after the Midwest floods and Southwestern droughts, which had slowed the economy in the preceding quarter.

The strongest performers during the quarter were sales of cars, homes, home furnishings and business investment.

Despite the growth, the department's measure of inflation showed it rising by only 1.3 percent, down from 1.6 percent during the third quarter.

The Clinton administration, which is facing mid-term elections this fall, was quick to hail the report as proof that its economic policies were working.

"You can't get much more solid and steady growth than that," Treasury Secretary Lloyd Bentsen said at a conference of mayors in Washington.

Another report released yesterday corroborated the good news. The University of Michigan's preliminary consumer sentiment index for January rose to 94.3, from 88.2 in December. It was the highest level since September 1989 and was further evidence that consumers are beginning to believe the positive statistics.

The reports sent the financial markets into overdrive, with the Dow Jones Industrial Average pushing toward 4,000 points.

The Dow closed up 19.13, at a record 3,945.43, on expectations that the growth would mean higher earnings for companies. Meanwhile, interest rates declined on the news of low inflation, -- with the yield on the 30-year long bond dropping 4.65 points, to 6.21 percent.

Economists pointed out, however, that the two trends are

contradictory.

"The two [growth and low inflation] aren't sustainable together. Ultimately they'll clash and inflation will rise. It's just a question of when," Mr. Dederick said.

The question is likely to be put to Federal Reserve Chairman Alan Greenspan when he testifies before Congress on Monday. With growth so high, several officials at the Fed have said that it may be wise to raise interest rates now as a pre-emptive strike against future inflation.

The Clinton administration is concerned, however, that higher rates would stifle the recovery.

The stock market is worried that higher interest rates would kill the bull market by drawing investors' money out of the market and into savings bonds or certificates of deposit.

Both the low inflation and the strong growth surprised economists, who had been predicting higher inflation and lower growth.

Carol Stone, an economist at Nomura Securities in New York, said most predictions had underestimated consumers' spending power.

"This implies that consumers have more staying power than we imagined and that businesses will be wanting to spend more to meet that demand. That could help further increase production and hiring," Ms. Stone said.

Purchases of new cars and furnishings for new homes jumped $34.3 billion in the fourth quarter. Spending by consumers on goods and services accounts for two-thirds of national economic activity.

Businesses also went on a spending spree during the quarter. Investments in new plant and equipment rose $29 billion, or 21 percent, nearly three times the rate in the third quarter.

The growth was reminiscent of the final months of 1992, when post-election excitement helped push up the economy 5.7 percent. That growth collapsed at the start of 1993 when the gross domestic product slumped back to a 0.8 percent rate.

This year, few economists predict such a hangover. The consensus forecast for 1994 is for steady growth of 3.0 percent, according to Blue Chip Economic Indicators, although the rate for the current January-March quarter may be slightly lower.

"Things really have changed over the past year," said John Shaughnessy, director of research at Advest Inc. "The fear now is that the economy could accelerate too quickly, not that it will decelerate."